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Client Moved from House A to House B on 1st Nov 2017. Still owns House A & B. Rented out House A now. Tax Implications?

Facts about the scenario :

House A bought in 2011 for $300K. Value of House $700K now and has refinanced house on this new value to buy House B.

On Nov 2017 bought a new bigger House B for principal residence for $900K.

Rented out House A on 1st Nov 2017.

Questions ;-

(a) Property tax for ONBEN , I suppose can be claimed from Jan 2017-Oct2017 for House A and then for Nov 2017- Dec 2017 for House B

(b) T776, declaration of rental income for 2 months should be made with corresponding expenses .

(c) Client (client is a commission employee) has 2200 signed by his employer(showing client needs to work from home), so I suppose home office expenses can be claimed for 10 months in accordance with House A and for 2 months on House B.

(d) Last one Principal residence Exemption- how to go about filling this form? This is very confusing.

(e) Anything else that I need to show on the tax return?

Please if anyone can help me with clarification of what essential steps I need to take to file this complex tax return.

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(a) Correct

(b) Correct. How did you determine the $700K value? If you haven't already done so, you might want to consider getting an appraisal of
the property to determine the market value of the home as of the Change in Use
date (Nov 1, 2017). This is your new starting point from a tax point of view
and for CCA purposes (depreciation). Assuming you decide to depreciate it;
which has pros and cons.

(c) Correct. Provided of course that they meet the requirements to
claim home office expenses to begin with.

(d) Complete the Principal Residence section on the bottom of
Schedule 3 first and it will pull some of the information into the T2091 for
you. On the T2091 complete the section indicating which tax years you are
claiming the exemption for (line 1 and 2). I suppose this would be 7 on
line 1 and 0 line 2.

Then in the "information needed to calculate the capital
gain" section, complete line 4 and 5 (this info should be the same as the
section above on line 1 and 2), take the $700K proceeds of disposition in box
9954 from above (which you entered on Schedule 3) and enter it on line 7, and
enter the $300K cost of the property when originally purchased on line 9. The
rest should calculate automatically for you.

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Hi @mike thanks for taking the time out for giving me an elaborate answer , I have one question :

(A) if my client wants to elect this House A(rented house) as a principal residence and he files 45(2) with the return, as my client thinks he will sell this house in the next 3 years for profit, so that the profit he makes is completely exempted i.e. $900K-$300K, . But I just spoken to a specialist in CRA, she told me that once a election is made though 45(2), it cannot be revoked , and for the next 4 years House A will be considered principal residence, and if client sells House B and wants to claim principal residence and revoke it from House A, in the next 4 years, he would have to penalty for revoking it, i.e. $100 per month upto a maximum of $8000K.

(B) My client doesnt want to claim CCA for now, therefore he has this option stated in (A) above open, if thats the case the steps you have mentioned in "Complete the principal residence section on the bottom of shedule 3....." does that need to be done?

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I'm no expert on the matter, but I've never heard that it can't be revoked. My understanding is it can be rescinded at any time, but if you do, then it's deemed to be sold on that date. I have no first hand experience with trying to revoke the election, but my understanding is you can. I'm just not sure if they will charge you penalties for doing so.

If you use the election, you CAN'T claim the principal residence exemption on property B during this time. However, I suppose if they allow you to revoke the election you might be able to.

You are deemed to rescind the election if you move back in to the home or claim CCA on the property. I've never heard of any penalties being charged in these cases, the election is simply rescinded. So, if CRA was going to charge you for revoking it voluntarily, I don't see why they would discriminate and charge you penalties. I suppose you could just move back into the property or claim CCA to avoid the penalties? Or maybe CRA would charge them in these case as well, but I've never heard of them doing so.

A better option is to perhaps file the 45(2) election retroactively at the time of sale (if it's to their advantage) and pay the $100 per month penalty at that time.

If claiming the 45(2) election, you are NOT deemed to sell the property and Schedule 3 and form T2091 is not required. If no election is filed, then Schedule 3 and T2091 need to be completed. If he decides not to use the election at this time, to keep his options open for a retroactive 45(2) election, he should NOT CCA the property during this time.

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